How long will this property cycle last?- Michael Matusik

There is a distinct housing cycle. Much of it driven by things that repeat – liquidity; the economy; rising demand; relative investment returns; scarcity & confidence – but there is always a “factor X” which builds influence & is often the key ingredient/s that causes imbalance.

But first things first – Australian house price growth has paused (well, at least during February) after rising for eight consecutive months. House prices are up 9.5% over the year.

I am not surprised, as there are natural limits to any market, regardless as to how strong an influence the “X factor” is; & eventually dwelling prices & rents are determined by the local market’s capacity to pay.

This property cycle – and especially for those Queensland markets entering a recovery or just about to – should have several years to go before reaching a market peak.

But high house price inflation now will see a much quicker market peak & potentially, a larger correction, in years to come.

For mine, this Queensland residential recovery should be more about increasing sales volumes & clearing excess resale supply and little to do with price or rent escalation. Appreciation yes; rampant increases no.

In my presentations of late, I outline that past residential cycles have shown an 8.5% average annual return. But I also go into some detail to explain why I think the next residential cycle – between now & 2021 – will be much milder – averaging 5% per annum on average. And this assumes that nothing really unforeseen happens.[sam id=41 codes=’true’]

I am dourer about the future for several reasons, including the limited impulse of future interest rates; no likely new government assistance packages (i.e. FHOG or NRAS); aging & changing demographics; budget deficits; more frugal governments; geopolitical shifts (the Russian periphery is only part of a wider changing picture); low housing affordability & structural changes to local/overseas employment.

Housing is affordable if you have good equity; a well-paid, full-time job or a well-stocked superannuation fund. But if you are starting out, or have limited equity, or work several part-time jobs, then Australia’s housing market is very expensive indeed.

Also, whilst jobs are being created, most of late are part-time. Three out of ten people are now employed part-time across the country.

Nearly 2 million workers are ‘underemployed’ – meaning they are working but would like more of it. Things are expensive. We just got our quarterly energy bill, I am still in stock!

At present, this cycle’s “factor X” – well it should really be “factors X” – are having a very inflationary impact. These include SMSFs’ push towards property; Chinese direct & indirect buying; loose FIRB rules & the lower Aussie dollar.

So far this has been largely confined to Sydney & Melbourne. But many Queensland developers & local agents are doing their level best to attract these influences north.

I wish them luck, as God knows it has been tough making sales over the last five years, but I don’t want them to be all that successful. We cannot afford its inflationary impact.

The graphic below suggests that these influences have already caused Sydney & Melbourne, by and large, to become unhinged for local reality.

Dwelling prices are over or approaching 10 times the disposable family household incomes in both cities.

When the music stops – and it always does – then values must fall in both cities. At best, values would plateau for a very long time. Think five years. Maybe ten. It happened in the late 1980s. History seems to repeat.

See..…interest rates will eventually rise; Chinese interest will wane; changes may happen to SMSFs or FIRB or the dollar will stabilise/increase. Worse still would be a hiccup or two regarding employment.

Both Sydney & Melbourne have now painted themselves into a corner, so to speak. Price-wise, there is very little wriggle room.

I do hope the current pause in house prices continues. I wrote late last year that values in both Sydney & Melbourne could fall this year. If they don’t pause, then both cities face a serious correction.

As for SEQ, well I am writing this type of missive much earlier than I anticipated, too. I pencilled in this type of post for later this year, even early 2015, as it was at that stage that I anticipated the term “irrational exuberance” might best describe the local market’s general mindset. But alas, I am covering this now.

Many I talk to – which is quite wondrous really, as only three months ago these same people described the local housing market as “dead” – are in a mad rush to buy something. Anything. They just don’t want to miss out on the price rush. Hmmmmm.

True, SEQ price points are much lower than Sydney’s; Melbourne’s & even Perth’s. SEQ’s gross rental returns are also higher, especially at present, at least for attached product. Yet current dwelling prices are already at 6.9 times earnings in Brisbane. Vacancy rates – especially in inner Brisbane – are already starting to rise.

The state has been through a lot in recent years, much of it bad from an economic point of view. SEQ cannot stomach a run on dwelling prices like we have recently seen in Sydney & Melbourne.

Asset appreciation of between 5% & 8% over the next 12 months, with a smaller price/rent top-up during 2015, would be welcome. Anything beyond that – for mine – is potentially breaking the bank.

I would be joining the chorus if Queensland’s dwelling price to household income ratio was lower. But it isn’t. We come a distant third – some will argue fourth – behind Perth, when it comes to international buying interest.

Interstate migration is very low these days to Queensland. This might change, as southerners are forced out of Sydney & Melbourne. But we need jobs to attract this movement.

A warm climate alone these days isn’t enough. Our dwellings, whilst still cheaper than Sydney & Melbourne, aren’t as cheap as they once were. Well not cheap enough for some to sell-up & take a punt in sunny Queensland.

Slow price/rent growth; much more sales & thereby reducing resale supply – now that’s want we need over the next couple of years. A mild cycle, not a rampant one.

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Michael is director of independent property advisory Matusik Property Insights. He is independent, perceptive and to the point; has helped over 550 new residential developments come to fruition and writes his insightful Matusik Missive

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